Massachusetts Electric Restructuring Roundtable February 28, 2003 Bill Huss – Senior Vice President Tom Michelman – Principal Consultant Summary Results of Recent National Studies on Retail Competition and Default Service

Presentation Summary Who is KEMA-XENERGY Findings from Retail Restructuring Study Findings from POLR Study

Retail Markets Growing Despite California and Enron, competitively served load increased from 15,000 MW to 40,000 MW in 2002. Texas market opens and seems to be a success Companies continue to enter the market including wholesalers Growth also occurs in other states such as Massachusetts and New York There have also been retailer exits -- but fewer The New Power Company ($700 million lost!) Credit ratings suffer

Growth in Load Migration 2002 saw large gains in migration. XENERGY estimates: 40,000 MW late-2002 vs. 15,000 MW in mid-2001 2.1 Million customers late-2002 vs. 1.4 Million in mid-2001 Project 7 to 10 thousand MW additional migration in 2003 Estimated Megawatts Switched by State

MA Switching Over Time Increases in C&I switching rates are related to drop in wholesale prices combined with increases in Default Service rates Increases in Standard Offer rates In addition increases in residential switching associated with Cape Light Compact and Dominion Retail entry

2002 Changes in Competitive Status IL: Nov. 2002 ICC allows ComEd to phase out capped rate default service for >= 3 MW customers NJ: Nov. 2002 BPU adopts new BGS with rates determined by competitive bid. Large C & I customers forced on hourly market passthrough. AR: 2003 legislation repeals electric restructuring law NM: 2003 settlement agreement terminates planned retail competition in PNM service territory. NY – Continues with their important retail unbundling proceeding. NYSEG customer choice program that’s part of a 5 yr rate plan and merger settlement. There are a lot of details, but the key elements are that customers have 3 primary choices: (1) a fixed, bundled rate from the utility (2) a variable, indexed supply rate from the utility and (3) a competitive supply rate. Backing Away from Competition Supporting Competition Status Quo

Retailers Showing Increased Profitability At least 15 retailers profitable in 2002 Reliant reports 25% gross margin Favorable wholesale market conditions Improved expertise and infrastructure Pricing and risk management Billing and customer service Lower acquisition costs Reliant reports $150 to $200 per customer Dominion reports $15/customer using direct mail Centrica and others focus on door-to-door, not mass advertising

No Single Successful Model Full service and niche players Regional and national successes Pure wholesalers, mass marketers, and energy service companies

Retailer Positions For the Retailers mapped on this slide we have some indication of profitability from Commonwealth Energy, Texas Commercial Energy, First Choice Power, NewEnergy, Strategic Energy, Sempra Energy Solutions, Pepco Energy Services, Reliant Energy. Select Energy did not show profitability in 2002. All the rest did not produce results or did not break out retail as a separate line item.

Mass Markets Continue to Lag Texas plan creates scale for major affiliates. TXU -- 2.7 million customers Reliant -- 1.8 million Centrica -- 1.4 million Other retailers with scale Green Mountain -- 550,000 customers First Energy Solutions -- 250,000 Dominion Retail -- 238,000 First Choice Power -- 190,000

Winter 02/03 Residential Switching

Non-Residential Customers Lead the Way 88% of Texas customers greater than 1 MW switched by Sept. 2002 Major suppliers TXU (8-12 GW) Reliant (7-10 GW) Constellation/New Energy (4.3 GW) Strategic Energy (2.6 GW) ConEd Solutions, Exelon Energy, First Energy Solutions, KeySpan Energy, Select Energy, Sempra Energy Solutions all around 1 GW

Winter 02/03 Nonresidential Switching

What to Watch in 2003 New Jersey market heats up Default service rates determined by competitive bid Large customers get hourly market rate Reliant considering market entry Texas will continue to lead -- 8-12% more migration Wholesale firms will continue to enter retail markets New York and the NYSEG unbundling proceeding Illinois-- large customer capped rate default service phased out Residential customers continue to lag as options appear as part of regulated service

Transition periods are expiring Generation price caps lifted Move to market-based default service pricing Customer assignment, etc. End Dates of Transition Periods *Definitions, rules and rate structures vary widely by state and service territory; some states have extended transition periods or others implemented post-transition rate periods.

Default Service Status & Trends Definitions Default Service. For those who have not chosen a supplier or who no longer have a relationship with a supplier. Includes “Standard Offer” and “Default Service” in Massachusetts POLR Service. Subset of Default Service. For emergency or temporary electricity supply.

Default Service Models & Market Effectiveness Fixed Administrative Price – MA SO Competitive Bidding / Price Indices – MA DS Wholesale Spot Price Pass Through – NJ HEP, MD-BGE Schedule P No Regulated Price – TX Non-PTB

DS Models - Typical Characteristics I

DS Models - Typical Characteristics II

DS Price Component Models Wholesale NJ-BGS, NJ-NYSEG BRO, OH DS Retail Adders MD-DS, NY-ConEd DS, DC-DS Retail TX-POLR, TX PTB, UK Deemed Contracts, PA GPU-CDS Example Wholesale Components: Energy procurement, capacity, ancillary services, wholesale hedging, other supply-related risk management, LMP, congestion costs, administrative costs, line losses, renewables, auction costs, transmission charges, Example Retail Components: Uncollectibles, metering, billing, call center, dispute resolution, distribution charges (possibily), return to default service provider.

Existing & Proposed Models for DS & POLR Design

Trends in DS & POLR Design

Perceived Pros: Utility as DS Provider High expected reliability Familiar regulatory control Confidence of continued market participation Historically good financial standing Established local retail infrastructure Perceived experience and wherewithal to procure supplies Preserves status quo for customers who do not choose – minimal confusion Communications and control tools at the onset of market opening Best position to handle emergency supply situations Established benefits from scale and customer diversity Avoids a transfer or involuntary reassignment of customers

Perceived Cons: Utility as DS Provider Incumbent advantages will lead to the utility being the “provider of first resort” Retail competition changes the regulatory compact: if no longer granted a supply monopoly, then why retain the associated public service obligation? Increases the need for a POLR because suppliers do not enter or will eventually exit the retail market Customers gain no experience with dealing with competitive retailers during the transition period Price caps result in unacceptable risks and inefficiencies with no upside potential Incumbent utility may no longer have the financial stamina as “wires companies” to handle POLR obligations Risks borne by single entity Incumbent may want out of the merchant business